Veeco(US:VECO)2019-11-04 22:17markdown [Safe Harbor Statement](index=4&type=section&id=Safe%20Harbor%20Statement) This section outlines the nature of forward-looking statements, emphasizing their susceptibility to risks and uncertainties that could cause actual results to differ materially from projections, and notes that financial statements involve management estimates and assumptions which may differ from actual outcomes [Forward-Looking Statements](index=4&type=section&id=1.1%20Forward-Looking%20Statements) This section outlines the nature of forward-looking statements within the report, emphasizing that they are subject to risks and uncertainties that could cause actual results to differ materially from projections, and notes that financial statements involve management estimates and assumptions which may differ from actual outcomes - The report contains forward-looking statements, identified by words like "believes," "anticipates," "expects," and "estimates," which are subject to risks and uncertainties that could cause actual results to differ materially from projected results[10](index=10&type=chunk) - Preparation of financial statements requires management to make estimates and assumptions that may ultimately differ from actual results, and operating results for the three and nine months ended September 30, 2019, are not necessarily indicative of the full year's results[11](index=11&type=chunk) [Risks and Uncertainties](index=4&type=section&id=1.2%20Risks%20and%20Uncertainties) Veeco Instruments Inc. faces diverse risks, including unfavorable market conditions, global business operations, international trade disputes, IT system disruptions, intellectual property challenges, stock price volatility, potential asset impairment, intense competition, rapid technological change, dependence on consumer electronics, concentrated customer base, industry cyclicality, order timing, long sales cycles, and supply chain dependencies - Key risks include unfavorable market conditions, global business operations, international trade disputes (U.S. and China), IT system disruptions, and intellectual property enforcement/infringement claims[12](index=12&type=chunk) - The company's common stock price is volatile and could further decline, and there's a risk of additional asset impairment charges[12](index=12&type=chunk) - Operational risks include a concentrated customer base, cyclical industries, fluctuating quarterly results due to order timing, long and unpredictable sales cycles, and reliance on a limited number of suppliers[13](index=13&type=chunk) [PART I—FINANCIAL INFORMATION](index=9&type=section&id=PART%20I%E2%80%94FINANCIAL%20INFORMATION) [Item 1. Financial Statements](index=9&type=section&id=Item%201.%20Financial%20Statements) This section presents Veeco Instruments Inc.'s unaudited consolidated financial statements, including Balance Sheets, Statements of Operations, Comprehensive Income (Loss), and Cash Flows, along with detailed notes on presentation, accounting policies, and specific financial line items [Consolidated Balance Sheets](index=9&type=section&id=2.1.1%20Consolidated%20Balance%20Sheets) Veeco's consolidated balance sheet shows total assets decreased from $900.8 million to $862.3 million, primarily due to reduced cash, while total liabilities slightly decreased and stockholders' equity declined from $437.8 million to $402.5 million Consolidated Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2019 | Dec 31, 2018 | Change | % Change | | :-------------------------------- | :----------- | :----------- | :------- | :------- | | Total Assets | $862,276 | $900,816 | $(38,540) | -4.28% | | Cash and cash equivalents | $135,259 | $212,273 | $(77,014) | -36.28% | | Short-term investments | $95,672 | $48,189 | $47,483 | 98.54% | | Total Current Assets | $486,281 | $520,080 | $(33,799) | -6.50% | | Total Liabilities | $459,806 | $463,041 | $(3,235) | -0.70% | | Total Stockholders' Equity | $402,470 | $437,775 | $(35,305) | -8.06% | [Consolidated Statements of Operations](index=11&type=section&id=2.1.2%20Consolidated%20Statements%20of%20Operations) Veeco reported a net loss for both the three and nine months ended September 30, 2019, with significantly decreased net sales, though the nine-month net loss improved from $(262.4) million in 2018 to $(45.9) million in 2019, largely due to the absence of a prior year asset impairment charge Consolidated Statements of Operations Highlights (in thousands, except per share amounts) | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net sales | $108,954 | $126,757 | $306,147 | $443,110 | | Gross profit | $42,223 | $46,385 | $113,223 | $158,459 | | Operating income (loss) | $(7,365) | $(3,873) | $(32,713) | $(276,521) | | Net income (loss) | $(11,767) | $(8,953) | $(45,862) | $(262,414) | | Basic EPS | $(0.25) | $(0.19) | $(0.97) | $(5.55) | | Diluted EPS | $(0.25) | $(0.19) | $(0.97) | $(5.55) | [Consolidated Statements of Comprehensive Income (Loss)](index=12&type=section&id=2.1.3%20Consolidated%20Statements%20of%20Comprehensive%20Income%20(Loss)) The company reported a total comprehensive loss of $(11.8) million for the three months and $(45.8) million for the nine months ended September 30, 2019, encompassing net loss and minor adjustments from unrealized gains/losses on available-for-sale securities and foreign currency translation Consolidated Statements of Comprehensive Income (Loss) Highlights (in thousands) | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (loss) | $(11,767) | $(8,953) | $(45,862) | $(262,414) | | Total other comprehensive income (loss), net of tax | $(42) | $0 | $16 | $0 | | Total comprehensive income (loss) | $(11,809) | $(8,953) | $(45,846) | $(262,414) | [Consolidated Statements of Cash Flows](index=13&type=section&id=2.1.4%20Consolidated%20Statements%20of%20Cash%20Flows) For the nine months ended September 30, 2019, Veeco used $23.0 million in operating, $54.0 million in investing, and $0.2 million in financing activities, leading to a $77.1 million net decrease in cash, cash equivalents, and restricted cash, similar to the prior year's significant cash usage Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Net cash provided by (used in) operating activities | $(23,005) | $(39,378) | | Net cash provided by (used in) investing activities | $(53,978) | $(15,388) | | Net cash provided by (used in) financing activities | $(162) | $(11,479) | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $(77,136) | $(66,249) | | Cash, cash equivalents, and restricted cash - end of period | $135,946 | $214,334 | [Notes to the Consolidated Financial Statements](index=14&type=section&id=2.1.5%20Notes%20to%20the%20Consolidated%20Financial%20Statements) The notes detail Veeco's accounting policies and financial statement line items, covering revenue recognition, lease accounting, income per share, asset valuations, liability breakdowns, commitments, share-based compensation, income taxes, and segment reporting by end-market and geographic region [Note 1 — Basis of Presentation](index=14&type=section&id=2.1.5.1%20Note%201%20%E2%80%94%20Basis%20of%20Presentation) This note outlines the basis for preparing Veeco's unaudited interim consolidated financial statements under U.S. GAAP and SEC regulations, detailing revenue recognition policies and lease accounting, including the adoption of ASC 842 which recognized ROU assets and lease liabilities without impacting income or cash flow statements - Interim financial statements are prepared in accordance with U.S. GAAP and SEC Regulation S-X, with all necessary adjustments being normal and recurring[30](index=30&type=chunk) - Revenue is recognized upon transfer of control of products or services to the customer, with judgment required for identifying performance obligations and allocating revenue for contracts with multiple deliverables[32](index=32&type=chunk)[33](index=33&type=chunk) - The company adopted ASC 842 (Leases) **effective** January 1, 2019, recognizing ROU assets and lease liabilities of approximately **$14.2 million** each, with **no impact** on the Consolidated Statements of Operations, Comprehensive Income, or Cash Flows[42](index=42&type=chunk)[43](index=43&type=chunk) [Note 2 — Income (Loss) Per Common Share](index=18&type=section&id=2.1.5.2%20Note%202%20%E2%80%94%20Income%20(Loss)%20Per%20Common%20Share) This note details the calculation of basic and diluted income (loss) per common share, which were negative for both periods, leading to the exclusion of potentially dilutive shares from share-based awards and convertible senior notes due to their anti-dilutive effect from the net loss Income (Loss) Per Common Share (in thousands, except per share amounts) | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (loss) | $(11,767) | $(8,953) | $(45,862) | $(262,414) | | Basic EPS | $(0.25) | $(0.19) | $(0.97) | $(5.55) | | Diluted EPS | $(0.25) | $(0.19) | $(0.97) | $(5.55) | | Basic weighted average shares outstanding | 47,489 | 46,982 | 47,361 | 47,283 | | Diluted weighted average shares outstanding | 47,489 | 46,982 | 47,361 | 47,283 | - Common share equivalents and potentially dilutive shares (including those from Convertible Senior Notes) were excluded from diluted EPS calculations because the company incurred a net loss, making their effect anti-dilutive[44](index=44&type=chunk) [Note 3 — Assets](index=18&type=section&id=2.1.5.3%20Note%203%20%E2%80%94%20Assets) This note details Veeco's asset composition, including short-term investments (which increased), accounts receivable, inventories (which decreased), property, plant, and equipment, goodwill, intangible assets (which decreased due to amortization), and non-marketable investments measured at cost Short-term Investments (Available-for-Sale) (in thousands) | Metric | Sep 30, 2019 | Dec 31, 2018 | | :---------------- | :----------- | :----------- | | Estimated Fair Value | $95,672 | $48,189 | | Gross Amortized Cost | $95,680 | $48,205 | | Gross Unrealized Gains | $10 | $0 | | Gross Unrealized Losses | $(18) | $(16) | Inventories (in thousands) | Category | Sep 30, 2019 | Dec 31, 2018 | | :--------------- | :----------- | :----------- | | Materials | $78,430 | $90,816 | | Work-in-process | $40,873 | $42,354 | | Finished goods | $15,887 | $23,141 | | Total | $135,190 | $156,311 | Intangible Assets, Net (in thousands) | Category | Sep 30, 2019 | Dec 31, 2018 | | :---------------------- | :----------- | :----------- | | Technology | $41,277 | $46,410 | | Customer relationships | $25,077 | $28,469 | | In-process R&D | $0 | $3,180 | | Trademarks and tradenames | $5,993 | $7,011 | | Other | $29 | $79 | | Total Net Intangible Assets | $72,376 | $85,149 | - Goodwill remained unchanged at **$184.3 million** during the nine months ended September 30, 2019[56](index=56&type=chunk) - The company holds non-marketable investments in Kateeva, Inc. (**$21.0 million**) and another entity (**$3.5 million**), measured at cost, with **no observable market price changes** during the nine months ended September 30, 2019[59](index=59&type=chunk) [Note 4 — Liabilities](index=25&type=section&id=2.1.5.4%20Note%204%20%E2%80%94%20Liabilities) This note details Veeco's liabilities, including decreased accrued expenses, stable warranty reserves, utilized and newly provisioned restructuring accruals, customer deposits, deferred revenue, and convertible senior notes whose carrying value increased due to amortization of debt discount and transaction costs Accrued Expenses and Other Current Liabilities (in thousands) | Category | Sep 30, 2019 | Dec 31, 2018 | | :-------------------------- | :----------- | :----------- | | Payroll and related benefits | $14,471 | $20,486 | | Warranty | $7,552 | $7,852 | | Operating lease liabilities | $4,730 | $0 | | Interest | $1,992 | $4,321 | | Professional fees | $2,794 | $2,897 | | Sales, use, and other taxes | $1,497 | $2,670 | | Restructuring liability | $1,617 | $2,213 | | Other | $5,988 | $6,011 | | Total | $40,641 | $46,450 | Changes in Restructuring Accrual (in thousands) | Metric | Dec 31, 2018 Balance | Provision | Payments | Sep 30, 2019 Balance | | :---------------------- | :-------------------- | :-------- | :------- | :------------------- | | Personnel Severance and Related Costs | $2,143 | $3,681 | $(4,207) | $1,617 | | Facility Related Costs and Other | $70 | $193 | $(263) | $0 | | Total | $2,213 | $3,874 | $(4,470) | $1,617 | Convertible Senior Notes Carrying Value (in thousands) | Metric | Sep 30, 2019 | Dec 31, 2018 | | :-------------------------- | :----------- | :----------- | | Principal amount | $345,000 | $345,000 | | Unamortized debt discount | $(43,780) | $(52,336) | | Unamortized transaction costs | $(4,410) | $(5,272) | | Net carrying value | $296,810 | $287,392 | - Total interest expense related to the Convertible Senior Notes for the nine months ended September 30, 2019, was **$16.4 million**, including **$9.4 million** in non-cash interest expense[68](index=68&type=chunk) [Note 5 — Commitments and Contingencies](index=27&type=section&id=2.1.5.5%20Note%205%20%E2%80%94%20Commitments%20and%20Contingencies) This note outlines Veeco's commitments and contingencies, including $11.9 million in operating lease obligations, $76.3 million in purchase commitments (mostly due within one year), bank guarantees, and ongoing class action lawsuits related to the Ultratech acquisition, which management believes will not materially adversely affect the company's financial position Operating Lease Commitments (in thousands) | Period | Operating Leases | | :------------- | :--------------- | | 2019 | $1,302 | | 2020 | $5,222 | | 2021 | $2,548 | | 2022 | $1,379 | | 2023 | $865 | | Thereafter | $551 | | Total | $11,867 | - Veeco has purchase commitments of **$76.3 million** at September 30, 2019, with substantially all due within one year[73](index=73&type=chunk) - Outstanding bank guarantees and letters of credit totaled **$7.8 million**, with **$66.4 million** unused, as of September 30, 2019[74](index=74&type=chunk) - The company is **vigorously defending** two class action lawsuits related to the Ultratech acquisition, but does **not believe their ultimate resolution will have a material adverse effect** on its financial position, results of operations, or cash flows[75](index=75&type=chunk)[76](index=76&type=chunk)[77](index=77&type=chunk) [Note 6 — Derivative Financial Instruments](index=29&type=section&id=2.1.5.6%20Note%206%20%E2%80%94%20Derivative%20Financial%20Instruments) Veeco uses monthly forward derivative contracts to mitigate foreign currency exchange rate risks, with fair value changes recorded in 'Other, net' as they are not designated as hedges, and had no outstanding contracts or related gains/losses during the nine months ended September 30, 2019 - Veeco uses monthly forward derivative contracts to mitigate foreign currency exchange rate risks, but these are not designated as hedges[78](index=78&type=chunk) - There were no outstanding derivative contracts at September 30, 2019, and no gains or losses from currency exchange derivatives during the nine months ended September 30, 2019[79](index=79&type=chunk) [Note 7 — Equity](index=30&type=section&id=2.1.5.7%20Note%207%20%E2%80%94%20Equity) This note details changes in stockholders' equity, including common stock, additional paid-in capital, accumulated deficit (which increased significantly due to net losses), and accumulated other comprehensive income (AOCI), which saw minor changes from unrealized gains/losses and foreign currency translation Changes in Stockholders' Equity (in thousands) | Metric | Dec 31, 2018 Balance | Sep 30, 2019 Balance | | :-------------------------- | :-------------------- | :------------------- | | Common Stock Amount | $485 | $489 | | Additional Paid-in Capital | $1,061,325 | $1,066,203 | | Accumulated Deficit | $(619,983) | $(666,058) | | Accumulated Other Comprehensive Income | $1,820 | $1,836 | | Total Stockholders' Equity | $437,775 | $402,470 | - The accumulated deficit increased by **$46.075 million** from December 31, 2018, to September 30, 2019, primarily due to net losses[80](index=80&type=chunk) - Accumulated Other Comprehensive Income (AOCI) increased slightly from **$1,820 thousand** to **$1,836 thousand**, driven by foreign currency translation gains and unrealized gains on available-for-sale securities[81](index=81&type=chunk) [Note 8 — Share-based compensation](index=31&type=section&id=2.1.5.8%20Note%208%20%E2%80%94%20Share-based%20compensation) This note details share-based compensation expense, totaling $11.5 million for the nine months ended September 30, 2019 (a decrease from $12.7 million), and provides activity summaries for stock options and non-vested restricted/performance shares, including grants, vestings, and forfeitures Share-based Compensation Expense (in thousands) | Line Item | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Cost of sales | $383 | $513 | $1,448 | $1,603 | | Research and development | $756 | $709 | $2,531 | $2,728 | | Selling, general, and administrative | $2,644 | $1,890 | $7,549 | $7,393 | | Restructuring | $0 | $167 | $0 | $996 | | Total | $3,783 | $3,279 | $11,528 | $12,720 | Non-Vested Restricted and Performance Shares Activity (9 Months Ended Sep 30, 2019) (in thousands) | Metric | Number of Shares | Weighted Average Grant Date Fair Value | | :-------------------------- | :--------------- | :------------------------------------- | | Balance - Dec 31, 2018 | 2,218 | $20.74 | | Granted | 1,048 | $11.41 | | Vested | (721) | $22.29 | | Forfeited | (176) | $19.41 | | Balance - Sep 30, 2019 | 2,344 | $16.02 | [Note 9 — Income Taxes](index=33&type=section&id=2.1.5.9%20Note%209%20%E2%80%94%20Income%20Taxes) Veeco's income tax expense was $0.1 million for three months and $0.4 million for nine months ended September 30, 2019, a significant change from a $28.0 million prior-period tax benefit, primarily due to tax amortization of indefinite-lived intangible assets that cannot offset U.S. deferred tax assets, which are fully offset by a valuation allowance Income Tax Expense (Benefit) (in thousands) | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Loss before income taxes | $(11,695) | $(8,652) | $(45,455) | $(290,368) | | Income tax expense (benefit) | $72 | $301 | $407 | $(27,954) | - The company's U.S. deferred tax assets are **fully offset by a valuation allowance**, as it is not more likely than not that these future benefits will be realized[84](index=84&type=chunk) - Domestic tax expense is primarily attributable to the tax amortization of indefinite-lived intangible assets that cannot offset U.S. deferred tax assets[86](index=86&type=chunk)[87](index=87&type=chunk) [Note 10 — Segment Reporting and Geographic Information](index=34&type=section&id=2.1.5.10%20Note%2010%20%E2%80%94%20Segment%20Reporting%20and%20Geographic%20Information) Veeco operates as a single reportable segment for thin film process equipment, with this note detailing net sales by four end-markets and geographic region, showing significant decreases in China and EMEA offset by increases in the United States and Rest of World - Veeco operates in **one reportable segment**: the design, development, manufacture, and support of thin film process equipment for electronic devices[89](index=89&type=chunk) Sales by End-Market (in thousands) | End-Market | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Advanced Packaging, MEMS & RF Filters | $11,381 | $24,562 | $50,951 | $76,473 | | LED Lighting, Display & Compound Semiconductor | $24,020 | $58,864 | $47,263 | $236,597 | | Front-End Semiconductor | $33,578 | $13,476 | $80,703 | $41,085 | | Scientific & Industrial | $39,975 | $29,855 | $127,230 | $88,955 | | Total | $108,954 | $126,757 | $306,147 | $443,110 | Sales by Geographic Region (in thousands) | Geographic Region | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | United States | $27,915 | $28,861 | $100,014 | $85,555 | | China | $17,034 | $39,200 | $46,846 | $185,050 | | EMEA | $19,128 | $30,685 | $49,280 | $71,836 | | Rest of World | $44,877 | $28,011 | $110,007 | $100,669 | | Total | $108,954 | $126,757 | $306,147 | $443,110 | [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=37&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on Veeco's financial performance and condition, including an executive summary, detailed operating results analysis, and discussion of liquidity and capital resources, highlighting declining sales in some markets offset by growth in others, cost reduction, and strategic R&D investments [Cautionary Statement Regarding Forward Looking Statements](index=37&type=section&id=2.2.1%20Cautionary%20Statement%20Regarding%20Forward%20Looking%20Statements) This statement reiterates that the discussion contains forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ materially from projections, and investors are cautioned not to place undue reliance on these statements - The discussion contains forward-looking statements, identified by specific terminology, which are subject to risks and uncertainties that could cause actual results to differ materially from projected results[96](index=96&type=chunk) [Executive Summary](index=37&type=section&id=2.2.2%20Executive%20Summary) Veeco, an innovative semiconductor process equipment manufacturer, serves four key markets, experiencing soft sales in Advanced Packaging and LED Lighting but growth in Front-End Semiconductor and Scientific & Industrial, while actively reducing spending, streamlining operations, and focusing R&D investments on growth areas - Veeco is an innovative manufacturer of semiconductor process equipment, holding **leading technology positions** in its markets[97](index=97&type=chunk) - Sales in Advanced Packaging, MEMS & RF Filters and LED Lighting, Display & Compound Semiconductor markets **remained soft** in Q3 2019, but the company is positioned for **future growth** in advanced packaging (5G, automotive, big data) and expects **future business** in VCSELs, 3D sensors, laser diodes, and RF devices[99](index=99&type=chunk)[100](index=100&type=chunk) - Sales in Front-End Semiconductor were driven by laser annealing and Low-Defect-Density Ion Beam Deposition (LDD-IBD) for EUV Mask Blank production, with expected **continued growth**[101](index=101&type=chunk) - Scientific & Industrial market sales were supported by Ion Beam systems for data storage and optical coatings, experiencing **growth in 2019** due to demand for improved areal density of magnetic heads[102](index=102&type=chunk) - The company is **reducing spending**, **streamlining operations**, and **focusing R&D investments on growth areas** like Laser Annealing, Advanced Packaging Lithography, Ion Beam, and new markets such as LDD-IBD for EUV mask blanks and MOCVD for Photonics[103](index=103&type=chunk) [Results of Operations](index=39&type=section&id=2.2.3%20Results%20of%20Operations) Veeco's results show declining net sales for both periods ended September 30, 2019, driven by softness in LED Lighting and Advanced Packaging markets, particularly in China, though gross margins increased, and operating expenses decreased due to the absence of a 2018 asset impairment charge, significantly improving operating and net loss [For the three months ended September 30, 2019 and 2018](index=39&type=section&id=2.2.3.1%20For%20the%20three%20months%20ended%20September%2030%2C%202019%20and%202018) For the three months ended September 30, 2019, net sales decreased by 14% to $109.0 million, primarily due to significant declines in LED Lighting and Advanced Packaging markets, particularly in China, resulting in a 9% decrease in gross profit despite increased gross margins, and leading to an operating loss of $(7.4) million and a net loss of $(11.8) million Key Financials (3 Months Ended Sep 30, in thousands) | Metric | 2019 | 2018 | Change | % Change | | :-------------------------------- | :----------- | :----------- | :------- | :------- | | Net sales | $108,954 | $126,757 | $(17,803) | -14% | | Cost of sales | $66,731 | $80,372 | $(13,641) | -17% | | Gross profit | $42,223 | $46,385 | $(4,162) | -9% | | Operating expenses, net | $49,588 | $50,258 | $(670) | -1% | | Operating income (loss) | $(7,365) | $(3,873) | $(3,492) | 90% | | Net income (loss) | $(11,767) | $(8,953) | $(2,814) | 31% | Sales by Market (3 Months Ended Sep 30, in thousands) | Market | 2019 | 2018 | Change | % Change | | :-------------------------------- | :----------- | :----------- | :------- | :------- | | Advanced Packaging, MEMS & RF Filters | $11,381 | $24,562 | $(13,181) | -54% | | LED Lighting, Display & Compound Semiconductor | $24,020 | $58,864 | $(34,844) | -59% | | Front-End Semiconductor | $33,578 | $13,476 | $20,102 | 149% | | Scientific & Industrial | $39,975 | $29,855 | $10,120 | 34% | Sales by Geographic Region (3 Months Ended Sep 30, in thousands) | Region | 2019 | 2018 | Change | % Change | | :------------- | :----------- | :----------- | :------- | :------- | | China | $17,034 | $39,200 | $(22,166) | -57% | | EMEA | $19,128 | $30,685 | $(11,557) | -38% | | Rest of World | $44,877 | $28,011 | $16,866 | 60% | - **Gross margins increased** due to product and region mix of sales, partially offsetting the decrease in sales volume[110](index=110&type=chunk) - Research and development expenses **decreased slightly** due to personnel-related expenses and professional fees from streamlining operations[111](index=111&type=chunk) [For the nine months ended September 30, 2019 and 2018](index=43&type=section&id=2.2.3.2%20For%20the%20nine%20months%20ended%20September%2030%2C%202019%20and%202018) For the nine months ended September 30, 2019, net sales decreased by 31% to $306.1 million, driven by declines in LED Lighting (-80%) and Advanced Packaging (-33%) markets, particularly in China, resulting in a 29% gross profit decrease, but the absence of a $252.3 million 2018 asset impairment charge significantly improved operating loss by 88% and net loss by 83%, despite a shift to tax expense Key Financials (9 Months Ended Sep 30, in thousands) | Metric | 2019 | 2018 | Change | % Change | | :-------------------------------- | :----------- | :----------- | :------- | :------- | | Net sales | $306,147 | $443,110 | $(136,963) | -31% | | Cost of sales | $192,924 | $284,651 | $(91,727) | -32% | | Gross profit | $113,223 | $158,459 | $(45,236) | -29% | | Operating expenses, net | $145,936 | $434,980 | $(289,044) | -66% | | Operating income (loss) | $(32,713) | $(276,521) | $243,808 | -88% | | Net income (loss) | $(45,862) | $(262,414) | $216,552 | -83% | Sales by Market (9 Months Ended Sep 30, in thousands) | Market | 2019 | 2018 | Change | % Change | | :-------------------------------- | :----------- | :----------- | :------- | :------- | | Advanced Packaging, MEMS & RF Filters | $50,951 | $76,473 | $(25,522) | -33% | | LED Lighting, Display & Compound Semiconductor | $47,263 | $236,597 | $(189,334) | -80% | | Front-End Semiconductor | $80,703 | $41,085 | $39,618 | 96% | | Scientific & Industrial | $127,230 | $88,955 | $38,275 | 43% | Sales by Geographic Region (9 Months Ended Sep 30, in thousands) | Region | 2019 | 2018 | Change | % Change | | :------------- | :----------- | :----------- | :------- | :------- | | China | $46,846 | $185,050 | $(138,204) | -75% | | EMEA | $49,280 | $71,836 | $(22,556) | -31% | | United States | $100,014 | $85,555 | $14,459 | 17% | | Rest of World | $110,007 | $100,669 | $9,338 | 9% | - The **significant decrease in operating expenses** and **improvement in net loss** for the nine months ended September 30, 2019, was primarily due to the absence of the **$252.3 million** non-cash intangible asset impairment charge recorded in Q2 2018[122](index=122&type=chunk)[131](index=131&type=chunk) - Income tax expense for the nine months ended September 30, 2019, was **$0.4 million**, compared to a tax benefit of **$28.0 million** in the prior period, mainly due to the absence of refundable alternative minimum tax credits and deferred tax benefits from the intangible asset impairment in 2018[134](index=134&type=chunk)[135](index=135&type=chunk)[136](index=136&type=chunk) [Liquidity and Capital Resources](index=48&type=section&id=2.2.4%20Liquidity%20and%20Capital%20Resources) Veeco's total cash, cash equivalents, restricted cash, and short-term investments decreased to $231.6 million from $261.3 million, as the company used cash in operating, investing, and financing activities, though management believes current cash and projected cash flow will be sufficient to meet obligations for the next twelve months Cash and Investments (in thousands) | Metric | Sep 30, 2019 | Dec 31, 2018 | | :-------------------------- | :----------- | :----------- | | Cash and cash equivalents | $135,259 | $212,273 | | Restricted cash | $687 | $809 | | Short-term investments | $95,672 | $48,189 | | Total | $231,618 | $261,271 | - Net cash used in operating activities was **$23.0 million** for the nine months ended September 30, 2019, primarily due to net loss, increases in accounts receivable, and decreases in accounts payable, accrued expenses, and deferred revenue, partially offset by inventory decreases[140](index=140&type=chunk) - Net cash used in investing activities was **$54.0 million**, mainly attributable to net changes in investments and capital expenditures[141](index=141&type=chunk) - Net cash used in financing activities was **$0.2 million**, related to the settlement of taxes for employee equity programs[142](index=142&type=chunk) - Management believes projected cash flow from operations, combined with current cash and short-term investments, will be **sufficient** to meet working capital, contractual obligations, and other cash needs for the next twelve months[137](index=137&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=49&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) This section discusses Veeco's exposure to market risks, including interest rate risk on its investment portfolio (where a 100 basis point increase could decrease fair value by $0.3 million) and currency exchange risk, which has an immaterial impact on consolidated results as most international sales are U.S. dollar denominated [Interest Rate Risk](index=49&type=section&id=2.3.1%20Interest%20Rate%20Risk) Veeco's primary interest rate risk exposure is its fixed-income investment portfolio, valued at approximately $95.7 million, where a hypothetical 100 basis point interest rate increase would result in an estimated $0.3 million decrease in fair value - Veeco's investment portfolio, with a fair value of approximately **$95.7 million** at September 30, 2019, is exposed to interest rate risk[148](index=148&type=chunk) - A 100 basis point increase in interest rates would result in an estimated **$0.3 million decrease** in the fair value of the investment portfolio[148](index=148&type=chunk) [Currency Exchange Risk](index=51&type=section&id=2.3.2%20Currency%20Exchange%20Risk) Veeco's global business exposes it to currency exchange risk, but with most substantial international sales (75% of Q3 2019 net sales) denominated in U.S. dollars, a 10% change in foreign exchange rates would have an immaterial impact on consolidated results - Net sales to customers outside the United States represented approximately **75%** and **67%** of total net sales for the three and nine months ended September 30, 2019, respectively[151](index=151&type=chunk) - Most of Veeco's sales outside the United States are denominated in U.S. dollars, leading to an **immaterial impact** on consolidated results of operations from a 10% change in foreign exchange rates[151](index=151&type=chunk)[152](index=152&type=chunk) [Item 4. Controls and Procedures](index=51&type=section&id=Item%204.%20Controls%20and%20Procedures) This section confirms that Veeco's management has evaluated and concluded that its disclosure controls and procedures were effective as of September 30, 2019, and that there were no material changes in internal control over financial reporting during the quarter - Management concluded that disclosure controls and procedures were **effective** as of September 30, 2019[153](index=153&type=chunk) - **No material changes** in internal control over financial reporting occurred during the quarter ended September 30, 2019[154](index=154&type=chunk) [PART II—OTHER INFORMATION](index=51&type=section&id=PART%20II%E2%80%94OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=51&type=section&id=Item%201.%20Legal%20Proceedings) Veeco is vigorously defending two class action lawsuits (Wolther v. Maheshwari et al. and Vladimir Gusinsky Revocable Trust v. Peeler, et al.) related to the Ultratech acquisition, alleging false/misleading statements and breach of fiduciary duty, and does not believe their ultimate resolution will materially adversely affect its financial position, results of operations, or cash flows - Two class action lawsuits, Wolther v. Maheshwari et al. and Vladimir Gusinsky Revocable Trust v. Peeler, et al., have been filed against Veeco related to the Ultratech acquisition, alleging false/misleading statements and breach of fiduciary duty[156](index=156&type=chunk)[158](index=158&type=chunk)[159](index=159&type=chunk) - Veeco is **vigorously defending** these legal proceedings and does **not believe their ultimate resolution will have a material adverse effect** on its consolidated financial position, results of operations, or cash flows[158](index=158&type=chunk)[159](index=159&type=chunk)[160](index=160&type=chunk) [Item 1A. Risk Factors](index=53&type=section&id=Item%201A.%20Risk%20Factors) This section refers to the risk factors previously disclosed in the Safe Harbor Statement within this Form 10-Q, as well as in the company's 2018 Form 10-K and the quarterly report on Form 10-Q for the quarter ended June 30, 2019, with no material changes to these risk factors having occurred - There have been **no material changes** to the risk factors previously disclosed in the Safe Harbor Statement, the 2018 Form 10-K, and the Q2 2019 Form 10-Q[161](index=161&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=53&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) Veeco's Board authorized a $100 million common stock repurchase program through December 11, 2019, of which $14.3 million had been utilized as of September 30, 2019, with no shares purchased during Q3 2019, and the program remains subject to modification or suspension - Veeco's Board authorized a **$100 million** common stock repurchase program through December 11, 2019[162](index=162&type=chunk) - As of September 30, 2019, **$14.3 million** of the repurchase program had been utilized, with **no shares purchased** during the third quarter of 2019[162](index=162&type=chunk) [Item 3. Defaults Upon Senior Securities](index=53&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) There were no defaults upon senior securities reported for the period - **No defaults** upon senior securities were reported[163](index=163&type=chunk) [Item 4. Mine Safety Disclosures](index=53&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to Veeco Instruments Inc - This item is **not applicable**[164](index=164&type=chunk) [Item 5. Other Information](index=53&type=section&id=Item%205.%20Other%20Information) No other information was reported under this item - **No other information** was reported[165](index=165&type=chunk) [Item 6. Exhibits](index=55&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Securities and Exchange Commission, including certifications from the Chief Executive Officer and Chief Financial Officer (pursuant to Rule 13a-14(a) or Rule 15d-14(a) and 18 U.S.C. Section 1350), and various XBRL documents - Exhibits include certifications from the CEO and CFO (31.1, 31.2, 32.1, 32.2) and various XBRL documents (101.INS, 101.XSD, 101.PRE, 101.CAL, 101.DEF, 101.LAB, 104)[167](index=167&type=chunk) [SIGNATURES](index=55&type=section&id=SIGNATURES) The report was duly signed on November 4, 2019, on behalf of Veeco Instruments Inc. by William J. Miller, Ph.D., Chief Executive Officer, and Shubham Maheshwari, Executive Vice President, Chief Financial Officer, and Chief Operating Officer - The report was signed on November 4, 2019, by William J. Miller, Ph.D., CEO, and Shubham Maheshwari, EVP, CFO, and COO[169](index=169&type=chunk)[170](index=170&type=chunk)